As is customary, this month’s deals will focus on those with disclosed financial terms. Whilst the weather in May in most of Europe was grey and cold, the pharma mergers and acquisition (M&A) market was hot. There were nine M&A deals announced, with an aggregate headline value of $20bn. And, on top of that, at the end of the month there were rumours circulating that the Indian generic company Sun Pharma is seeking to buy Meda for around $5bn. This news caps what has been the most active month this year for deals.
‘Seven Days in May’
John Frankenheimer’s film about a plot to stage a military coup in the US compares well to the number of M&A ‘coups’ published in the seven day period from May 20. First on the scene was the announcement that Actavis would buy Warner Chilcott for $8.5bn., On the same day Elan announced the acquisition of both AOP Orphan for up to $693m and a 48 per cent share of Newbridge for $40m, and an option to buy the rest for $240m. A day later Novo Nordisk said it would buy Xellia for $700m. The next day BTG announced two deals worth $420m; then came Valeant’s $8.7bn bid for Bausch & Lomb…and so on for the rest of the month and, with the latest Meda rumour, early June also looks promising. Maybe the European weather will pick up as well.
‘Frenzy’
The M&A deal frenzy could hardly be compared to Hitchcock’s film about a serial killer. Nevertheless, Elan’s deal activity is reminiscent of the killer’s frantic search through a lorry load of potatoes (potatoes = deals in this context) to find something to secure his future. The Elan/ Royalty Pharma saga began following Biogen Idec’s decision in February to buy out the Tysabri rights from Elan for $3.25bn. The windfall prompted Royalty Pharma to make a $6.55bn bid for Elan arguing that the shareholders would prefer cash than leave it in the hands of the Elan management to invest in a new pharma business. Following the close of the Tysabri deal in early April, Elan went on a spending spree in May.
First in this was the purchase for $1bn of 21 per cent of the respiratory product royalties Theravance receives, including the royalties on the recently US approved Breo for COPD being marketed by GSK. Secondly Elan spent $693m on the Austrian company AOP Orphan with sales of $76m and products in development. And thirdly, an unusual deal where Elan spins out its clinical stage CNS asset ELND005 to a new company, Speranza, whereby Elan pays Speranza (not the other way around) up to $70m in fees and loans. In return, Elan receives an 18 per cent share in Speranza and an option to commercialise the product in some countries, a 3 per cent royalty on sales of ELND005 products and potentially two $200m milestones. Nerano, a company controlled by a former director of Elan Corporation, Seamus Mulligan, will hold 62 per cent of Speranza shares and the remaining 20 per cent will be issued to senior management who work on ELND005 and who will transfer from Elan to Speranza. A further $20m in loans is being made by Nerano to the new company.
The next eye-popping episode will be at the extraordinary general meeting on June 17 when the Elan shareholders will be asked to vote on four strategic transactions: Theravance, AOP Orphan, Speranza and a $200m share repurchase programme. According to press reports, analysts have been critical of the Theravance deal but the Elan CEO says that if the shareholders reject the deals (costing $16m in break fees) there is a ‘Plan B’. According to Royalty Pharma, Elan is “pursuing a frenetic jumble of value destructive [deals]” and the “proposed transactions offer no coherent strategy and are not in the best interests of Elan or its shareholders.”
‘Four Weddings and a Funeral’
Looking at the recent activity of Actavis, Mylan and Valeant, one could be forgiven for thinking it was another romcom script. At the end of April the Financial Times reported that the engagement between Valeant and Actavis – for Valeant to pay $13bn in an all-stock deal – had been called off. A few days later, Actavis paid $55m for Valeant’s metronidazole gel, a bit like keeping possession of the engagement ring. With both parties hurting from the bust-up, Actavis went off and married Warner Chilcott for $8bn and Valeant married Bausch and Lomb for $8.7bn. Apparently Mylan was also considering an acquisition of Actavis but has been jilted.
So what is the logic of these deals? he noteworthy aspect is that all the players rely on expansion of their business by acquisition of products or companies with marketed products and brands. This is in contrast to big pharma who more often acquire companies with technologies or development stage products to bolster their pipeline. A point made by the Economist is that Valeant’s R&D spending is 2 per cent of sales so it does not seek to generate growth from internal R&D. The same applies at Actavis and Mylan where R&D spending is 6 per cent of sales, which is typical of generic companies. Meda’s expansion has also been driven by product acquisitions and in the process incurred $2.25bn of debt and 50 per cent gearing. Similarly, the size of the deals by Valeant and Actavis means that serious debt or new equity will be needed and it does beg the question how much more Valeant and Actavis can develop their business in this way.
‘Brewster’s Millions’
The $30m spending spree that had to be achieved by Monty Brewster in 30 days to secure $300m is nothing compared to the money big pharma companies invest as they continue to buy companies and license products and technologies to supplement their pipelines. The deals that fall into this category are: Forest’s $460m option to license a phase II acute heart failure treatment from Trevena; Merck’s $430m licence of diabetes type 2 targets from Abide; Takeda’s $250m acquisition of Inviragen; GSK’s $325m acquisition of the vaccine platform technology company, Okairos; and BMS’s $112m licence for antibody conjugates from Ambrx. Note that some of the headline numbers can be misleading, the Ambrx/BMS $112m deal consists of $15m upfront and then $97m per product, whereas the Abide/Merck $430m deal includes the upfront and rights to three products. On a like-by-like basis, the deals may be much the same size.
Some of the big pharma companies that have been damaged by products falling off the patent cliff are seeking late-stage or marketed products to bolster sales. AstraZeneca’s (AZ) new CEO’s first acquisition is Omthera, a US company with its omega-3 product in registration. The good news is that the product is late-stage and is likely to be approved and will fit alongside Crestor. The less good news is that the market is highly competitive and AZ paid an 88 per cent premium for the company’s shares.
BTG also has had to find new late stage opportunities after the Cytofab collaboration with AZ was terminated last August. So this month it acquired two marketed products, the EKOS device with $28m sales and the Therasphere business of Nordion with $48m sales. Shire continues to follow the rare disease path with its co-development with Nimbus using its discovery platform. The financial terms were not disclosed but it seems that Shire’s alliance with Atlas Ventures is bearing fruit. Another venture captial company, Novo A/S, the company that manages the $30bn assets of the Novo Nordisk Foundation, has also made a major deal with the $700m acquisition of the Norwegian company Xellia, which manufactures anti-infective API and generic products. Xellia is a spin out from Alpharma and had sales of $220m in 2012. In addition, Novo A/S closed a $125m royalty purchase deal with Ophthotec and agreed to lead the $50m Series C funding.
‘Panic in the Streets’
The threat of a person with bubonic plague spreading the disease in New York as portrayed in Elia Kazan’s film may be diminishing. There is a trend developing whereby government and NGOs fund big pharma companies to develop products that have scientific challenges and/or have a low return on investment such as anti-infectives. The latest example is the agreement between BARDA, part of the US Department of Health, and GSK worth up to $200m to develop new antibiotics. In effect, governments and NGOs are stepping in to correct the ‘market failure’ of low pricing in certain disease areas that deters companies from development of new products that are likely to have low returns.
In Japan six local companies are contributing, along with the Bill and Melinda Gates Foundation, $100m for development of treatments for diseases prevalent in the developing world. Another public/private partnership announced in May is the $50m investment from Lilly and Roche Diagnostics and the State of Indiana as a start-up fund for a new research institute focused on metabolic disease. In effect, these public/private deals provide a risk sharing approach to development of new treatments and, hopefully, many more will happen.
See a table listing all the major pharma mergers, acquisitions and collaborations during May 2013